The most renowned stock investor in the world, Warren Buffet, is coming to Australia. Not to give talks and speeches — no. It’s bigger than that. The legendary investment guru is set to build a significant portfolio of Aussie companies in the next few years. He explains:
‘There is money to be made in Australian equities over the next 10, 20, or 30 years. If we get something we feel comfortable with, we’ll stick with it for a very long time.
‘I do know that five or 10 or 20 years from now, both the United States and Australia are going to move forward, real per capita household income and GDP is going to increase’.
He’s not mucking about either. Buffet, through his company Berkshire Hathaway [NYSE:BRK.A], expects to invest $2 billion annually into the stock market. Berkshire is a major conglomerate with annual revenues of up to US$200 billion, with investments extending across a wide range of sectors.
Buffet acknowledged that he’d be investing in more marketable securities in Australia for many years to come. He predicts he’ll retain a portfolio of up to five Aussie companies in the next couple of years.
Investors will no doubt be keen to know which companies Buffet is eyeing up. Which begs the question, which companies are in line for a major windfall in the next few years? Perhaps unsurprisingly, Buffet is watching the banking sector with keen interest.
Insurance Australia Group deal was just the start — a big four bank could be next in line
Yesterday was a big day for Insurance Australia Group [ASX:IAG]. Their tie up with Berkshire was their first big play in Australia. Berkshire took a 3.7% stake in IAG, injecting $500 million into the Australian company.
Buffet will use funds from that deal to reinvest into other big Aussie companies. The reason why he’s doing this is mostly down to money. Well, you don’t become as successful as Buffet without thinking about the bottom line. You see, the profits that IAG generate are paid out in Australian dollars. Buffet, keen to avoid any future pitfalls with the fluctuating local currency, plans to reinvest those AUDs back into Australia. It makes sense after all.
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Not only are there attractive opportunities in Australian stocks, but he’d lose money because he’d have to convert it to US dollars if he wanted to reinvest back into the US stocks. There’s also no telling how low the Aussie dollar will trend against the greenback over the next few years.
So why banks? Banks have been darlings of traders for a long time. And they remain an attractive option for most investors looking for safe, reliable returns. But don’t take my word for it. Mr Buffet explains.
‘Banking is something I have looked at. I am comfortable with banks. We have some big positions in US banks. I will certainly be looking at the banks.
‘In looking at banks, I would say there is a good chance that five years from now, we will have brought one or more positions in Australian banks’.
That means at least one bank will be the beneficiary of substantial new investment in the future. But there may be a downside, as the ‘future’ may still be some way off.
Buffet is likely to be put off by the current valuation of the big Aussie banks. He’s built his fortune on conservatism, and he’s not likely to shy away from that mantra now. Stocks have to meet a certain set of criteria before Buffet makes any commitments, which includes buying stocks at bargain prices.
One of his principles is to steer clear of stocks which appear to be trading at higher than their true value. Right now, the average PE ratio for banks may prove to be too high for his liking. It’s currently sitting at 12.6, which is higher than its four year average. True, it has slipped back in recent months as some investors have moved out of the sector. But that decline is probably not enough to whet his appetite by investing in the sector over the next six months. That means he’ll more than likely hold out until next year before buying any stake in banks.
Nonetheless, Buffet’s entry into the Aussie stock market is a ringing endorsement for local investors. Some will point to it as a sign that the fears over a potential stock bubble crash are overstated. But the same rules still apply — crash or otherwise. Some stocks get wiped out, while others thrive. The trick, as Warren Buffet will attest to, is to know where to hedge your bets.
Contributor, The Daily Reckoning
PS: As Buffet points out, even he can’t predict all the ups and downs of volatile stock markets. Whether his Australian portfolio will prove to be a winner remains to be seen. A man with his nous for equities probably isn’t going to do too badly. But the same can’t be said for ordinary investors. Those without Buffet’s experience will see plenty of downs over the next few years if they’re not careful with their investments.
The Daily Reckoning’s Vern Gowdie believes several blue chip stocks are set to crash over the next year. Vern is the award-winning Founder of the Gowdie Family Wealth advisory service. He’s been ranked as one of the Australia’s Top 50 financial planners.
That’s why Vern’s written ‘Five Fatal Stocks You Must Sell Now’. In this free report, Vern wants to help you profit from the coming wealth destruction. He’ll show you which five major Aussie companies could destroy your portfolio — you almost certainly own one of them. To find out how to download the report, click here.